Six Continents Ltd – renewed application for summary

Highlights

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Six Continents is a taxpayer with a High Court restitutionary claim enrolled in the Controlled Foreign Companies (CFC) & Dividend Group Litigation Order (GLO). This renewed application for summary judgment was made in respect of the recovery of unlawfully paid corporation tax (CT) on dividend income under Schedule D Case V (DV tax). This follows Henderson J’s decision in October 2015, where he refused to give summary judgment to the taxpayer, instead making an order for interim payment except for those parts of the claims relating to dividends paid up from share premium accounts of overseas group subsidiaries. There is no dispute between the parties that the DV tax charge was unlawful following the previous Court of Justice of the European Union (CJEU) judgments in the FII GLO - the judgment instead concerns particular issues arising on quantifying the level of credit to apply arising from this taxpayer’s particular background facts.

The first issue concerned whether Six Continents was entitled to a credit at the foreign nominal rate (FNR) of CT for those elements of the dividends deriving from revaluation adjustments. The taxpayer argued that the accounting profits of the Dutch group subsidiary arising from the revaluation adjustment were in principle ‘subject to the Dutch standard rate of corporation tax’ despite being eliminated from the amounts then actually charged to tax under Dutch domestic rules. The taxpayer’s expert evidence was preferred by Henderson J because the reasoning seemed to ‘fit better’ with the Dutch domestic provisions and analysis provided by the Dutch Supreme Court. This approach also gives proper effect to the reasoning of the CJEU in the second reference in the FII GLO, being that giving a tax credit at the relevant FNR will mitigate economic double taxation.

The second issue concerned whether Six Continents was entitled to a credit at the FNR for those elements of the dividends arising from the liquidation of another group sub-subsidiary, and Henderson J followed the same approach as the first issue, deciding in the taxpayer’s favour. The liquidation profits derived from the sub-subsidiary were again considered in principle ‘subject to the Dutch standard rate of corporation tax’ in the hands of the Dutch group subsidiary which paid over the dividend to the UK despite them being exempt from a charge to tax in the Netherlands under the relevant domestic provisions which applied.

The third issue concerned whether Six Continents was entitled to a credit at the FNR for those elements of the dividends arising from the share premium account of another group sub-subsidiary. In this case, the Dutch subsidiary which paid over the dividend to the UK was in a ‘fiscal unity’ with the sub-subsidiary (and others) in the Netherlands and was therefore treated as a single taxable entity.

In light of the ‘fiscal unity’ position, while Six Continents accepted the return of share capital by the sub-subsidiary did not generate any profit for Dutch tax purposes in the hands of the subsidiary paying over the dividends to the UK, it advanced an alternative argument: had the two Dutch entities been UK-resident companies then the UK tax system would have allowed the benefit of the lower effective tax rate to pass up the corporate chain to Six Continents as UK parent. In contrast, the UK system created a tax charge which was discriminatory treatment contrary to the EU Treaty Freedoms (freedom of establishment and free movement of capital). Henderson J disagreed: it was not the case that the UK taxes returns of capital by UK resident companies more advantageously than those made in a cross border situation from non-resident companies, instead the returns of capital by a non-UK resident company were outside the scope of UK tax altogether. As such, the DV charge for these elements of the dividends is compliant with EU law.

Henderson J also awarded compound interest on the principal sums of unlawful tax, but each party has the right to apply for revision of this in light of the result of HMRC’s pending Supreme Court appeal in Littlewoods (due to be heard mid-2017).